Banks and FinTechs are likely to be collaborators rather than outright competitors as legacy institutions look to embrace new business models, panel members discussing the future of wealth management in the region said.
FinTechs are already partners to brick-and-mortar banks, who are quickly embracing new ways of doing business, Deepak Mehra, head of investments at Commercial Bank of Dubai, said.
Although traditional banks have advantages such as a sizeable legacy customer base and the availability of huge capital, they cannot afford to maintain the status quo and must adapt to changing customer demographics as well as a looming generational wealth transfer, Mr Mehra told the online panel discussion organised by AIM Summit and Saxo Bank on Monday.
“The day[s] of financial intermediaries making a lot of money is over as margins continue to compress. Fund managers can no longer get away by charging a 2 per cent fee,” he said.
Almost $68 trillion will change hands between various generations over the next 25 years, according to research firm Cerulli Associates.
“In response, banks are reinventing, repositioning or creating new digital brands for wealth solutions,” Mr Mehra added.
Citing a 2019 survey by consultancy Bain & Company, he said millennials trust banks more than non-bank financial institutions. However, they trust companies like Amazon and Apple equally as much as lenders and could face a substantial threat if big tech companies decide to get into the wealth business, Mr Mehra said.
Mark Chahwan, co-founder and chief executive of robo-advisory firm Sarwa, said there is a massive opportunity for his firm's services in the region given the presence of a young, technologically-savvy population of untapped investors.
“The role of an IFA has changed. They were associated with high fees in the UAE. The era of high commissions is coming to an end,” Mr Chahwan said, adding that technology can help address the behaviour gaps that lead to sub-optimal results.
Recent regulatory changes in the UAE are expected to clamp down on the mis-selling of financial products. Under the changes, the Insurance Authority capped the commission payable on a policy over its entire lifespan, while financial advisers must include a mandatory 30-day "free-look" period that allows customers to cancel any investment plans for free within the first month of their inception. Advisers are also required to provide a benefit illustration to customers before a policy commences and provide a performance statement every six months.
People also want direct access to markets, which means funds by active managers are waning in popularity while cheaper, passive products like exchange-traded funds are increasing, Mr Mehra said.
Research has shown that over the long term, passive funds beat most actively-managed funds. For instance, index funds outperformed 70 per cent of all actively-managed US mutual equity funds in 2019, according to the S&P Indices Versus Active report.
There will be a differentiation in how services are provided, Mr Mehra said. The decline in the number of bank branches means that although a hybrid model might still work for high-net-worth private banking or mass affluent customers looking for in-branch advice, it may no longer be financially viable to offer such services to the majority of customers, he added.
Meanwhile, Thomas Schornstein, executive board member of additiv, a Swiss-based hybrid wealth management platform, said there is huge scope for banks in the Middle East to repatriate capital lost to offshore businesses.
“The advantages of increasing political stability and a rising middle class should not be lost to international banks,” Mr Schornstein said.
Recent policy changes and capability building have helped local lenders to close the product gaps with their international counterparts, according to CBD’s Mr Mehra. “As more banks embrace technology, we will keep reducing product gaps and creating domiciled capabilities that did not exist so far.”